Economists polled by Reuters had expected consumer inflation of 2.7 percent and producer prices, also referred to as factory-gate prices, to fall 1.3 percent.

"The headline CPI [consumer price index] is in-line with our view, so it's not surprising, but the PPI [producer price index] is more negative than we expected," Shen Minggao, head of China research at Citi, told CNBC.

"PPI inflation has been there for over a year, and it's being driven by over-supply on one hand and weaker demand on the other," he said.

Asian stock markets were little changed following the release of the data, while the Shanghai Composite was 0.3 percent higher at 2,050 points.

The fall in Chinese factory prices in December marked the 22nd month of straight declines, according to Reuters.

China's economy is back in focus amid weaker-than-expected data over the past few weeks and amid persistent concerns about the risks high credit growth pose to the world's second biggest economy.

Indeed, some analysts said looking at the latest inflation data alone was not enough to assess the outlook for China's monetary policy.

"To focus on inflation does not give us a full picture… we know credit growth has continued unabated with much of it coming from non-banking sources," Anantha Nageswaren, CEO at Vansight told CNBC Asia's "Cash Flow."

"So does the PBOC [People's Bank of China] respond to the lower inflation numbers and ease monetary policy or does it focus on credit growth and the fact that we've had news that a lot of money has come in via Hong Kong disguised as credit payments?," he said.

"Like all central banks, focusing just on the inflation picture would be incomplete because underlying credit inflation is the real story and China needs to curb that, and to do that it's not prepared to sacrifice short-term economic growth," Nageswaren added.